Stuck in Debt? Exploring Debt Settlement as a Solution

Oftentimes, unfortunate situations push people into the spiral of debt. This web of accumulating debt is not easy to escape. Especially if you keep paying your creditors in small monthly installments. So, how do you escape this spiral? Debt Settlement could be the answer for you! If you also feel like you are stuck in debt, this blog will help you to understand debt settlement and how it can help you in getting out of debt quicker. 

What is Debt Settlement?

Understanding the debt settlement

Debt settlement can be defined as a strategy where you pay your creditor less than the total amount you currently owe. In debt settlement, you pay back a portion of your debt in exchange for them forgiving the remaining balance. Also, It is legal in Canada. But before you choose Debt Settlement you should understand if it is really the best option for you. Following are a few situations in which choosing Debt settlement can be a good idea:

  • You're facing difficulty in making minimum payments on your debts.

  • You have huge unsecured debt.

  • Collection agencies are harassing you.

  • You're committed to a long-term debt relief plan (it can take several years).

You might want to reconsider your choice of Debt settlement, if:

  • You have good credit and want to maintain it.

  • You have a steady income and can catch up on payments.

  • You have a small amount of debt.

Strategies for Debt Settlement:

Strategies for debt settlement

  1. Negotiating Yourself: This is a DIY option where you can directly contact creditors (after they've written off the debt or it's past due) to propose a lump sum payment in exchange for forgiving the remaining balance. Strong negotiation skills and good timing are crucial.

  2. Debt Settlement Company:  These are the companies that handle negotiations on your behalf, aiming to settle your debt for less than you owe. You'll make regular deposits towards a lump sum settlement offer. This might look like a convenient option but these companies charge high fees (20-25% of your original balance) and there's no guarantee of success.

  3. Consumer Proposal with a Licensed Insolvency Trustee (LIT): This is a government-regulated program that offers the most secure option.  An LIT negotiates a court-approved repayment plan with your creditors, stopping collection actions and interest charges on included debts. You'll only start repaying your creditors after the proposal is filed, with fees built into your monthly payments.

Risks Involved in Debt Settlement:

Debt settlement can be a good option, but it's important to understand its potential drawbacks before enrolling in a program. Here are some key risks:

  • Credit Score Impact: Stopping payments can lead to accounts going into collections, which will severely damage your credit score for several years. This can make it difficult to qualify for loans, mortgages, or even rent an apartment in the future.

  • Fees: Debt settlement companies charge fees, typically a percentage of the debt they settle. Some companies might have some hidden costs. Make sure you understand all fees upfront to avoid any extra costs.

  • Tax Implications: The CRA may consider the forgiven debt as taxable income. You should consult a tax professional for better guidance w.r.t your situation.

  • Time Commitment: The whole process can take several months, or even years, to complete depending on your situation and the success of negotiations.

  • Uncertainty: There's no guarantee that the debt settlement company will be able to successfully negotiate a lower settlement with all your creditors.

Conclusion

Debt settlement is a good option for significant debt reduction and streamlined monthly payments. However, it comes with a significant credit score hit, fees, and potential tax implications. You should carefully understand the advantages and disadvantages before deciding if it's the right solution for your financial situation. If Debt settlement does not align with your long term goals, you can explore other alternatives like debt management plans or credit card balance transfers to see if they might be a better fit for your creditworthiness and overall financial goals.

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